Financial Fitness

Financial Windfall? Consider These 6 Actions First

Smart advice for getting more from an unexpected influx of wealth.

by Michelle Crouch - January 14, 2019

If you recently came into a substantial amount of money, you might be tempted to start spending that financial windfall right away.

But whether the money is from an inheritance, the sale of a business, life insurance proceeds, a major bonus, or some other means, you should consider the long-term consequences (and potential benefits) before you start spending, says Kyle Fuehne, a Financial Planning Consultant with Wells Fargo Advisors.

“Often, people don’t spend enough time thinking through what they want to do, Fuehne says. “They just jump in and start spending. But the money always goes quicker than you expect.”

Fuehne offers this advice to help make sure you’re getting the most out of your financial windfall.

1. Consider the tax implications.

Fuehne recommends consulting a certified public accountant or tax specialist to learn the steps you should take to help minimize the potential tax burden of your windfall. Laws governing inheritance tax vary by state, for example. Different types of assets have different tax implications, and your tax rate will depend on what kind of windfall you received and where you received it. 

2. Consider stashing it somewhere smart for the short term.

Consider placing your cash somewhere stable, such as in a money market account or even a short-term CD, which may offer better returns than most savings accounts.

3. Consider investing, even slowly.

“It’s okay if it takes one or two years to invest it all,” Fuehne says. “Investing slowly over time can allow you to implement a dollar cost averaging strategy, which is an investment technique designed to help protect against a big downturn.” (Read “Dollar Cost Averaging: Why This Simple Strategy May Be Beneficial” for more.)

4. List your goals and priorities.

You may have an immediate need or wish, such as paying for a child’s wedding or paying off a college loan. But consider how that will impact future financial needs. Would you be better off paying off your mortgage, for example? Could this impact your ability to retire early? Do you want to start a business? You may want to talk to a financial advisor about these short- and long-term goals and how the windfall fits into your overall plan. You can even ask to run tests of your plan in different market environments to gauge its effectiveness.

5. Update your estate planning and gifting plans.

If you want to share your wealth with loved ones, you can give someone up to $15,000 a year without paying gift tax under current law. (Read “Gifting Strategies to Help Pass on Wealth” for more.) Also consider updating your estate plan. Setting up a trust may be the best way to provide for your family and control what happens to your assets after you die. An estate planning attorney can advise you about the different types of trusts and help you choose the best one for your family.

6. Consider alternative ways to give to charity.

When considering the tax impact of your windfall, you may want to give appreciated stocks or concentrated equity positions to be more tax efficient versus donating directly, Fuehne says.

Two additional options:

  • A donor-advised fund, which gives you a tax deduction now but lets you make a long-term impact.
  • A charitable remainder trust. This lets you make a donation to the trust, and then it would make monthly payments to you. After a specified time or at your passing, the remaining assets in the trust would go to a charitable beneficiary.

For more on both strategies, see “Finding a Charitable Giving Strategy That’s Right for You.”

Michelle Crouch writes about consumer finance, parenting, and more from her home in Charlotte, North Carolina. Her work has appeared in Reader's Digest, Parents magazine, and The New York Times.

Image by iStock

Additional Resources

Does your windfall have you thinking about an estate plan? Here’s a document checklist to help you get started.

Wells Fargo Advisors is not a tax or legal advisor.

A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets.

Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors.  Wells Fargo Advisors and its affiliates do not provide legal or tax advice. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

Unlike money market funds, CDs are federally insured and offer a fixed rate of return. Money market accounts seek to maintain fixed principal, but rate of return will fluctuate.